Report to Congressional Committees 

United States General Accounting Office 

GAO 

May 2003 DEFENSE TRADE 

Report and 

Recommendations of 

the Defense Offsets 

Commission Still 

Pending 

GAO-03-649 
In February 2001, the National Commission on the Use of Offsets in Defense 

Trade issued an interim report, Status Report of the Presidential 

Commission on Offsets in International Trade. However, the Commission’s 

final report and recommendations are still pending—a year and a half after 

its mandated reporting date. The last Commission meeting was held on 

December 4, 2000, and no further activity is apparent. The 2001 change in 

presidential administrations resulted in vacancies in the five executive 

branch positions on the Commission, which have yet to be filled. 

The interim report describes the extent and nature of defense-related offsets 

in both defense and commercial trade. For example: 

• The cost to U.S. exporters of implementing defense offset transactions is 

a fraction of the transactions’ value. 

• The extent of defense offsets relative to defense exports has remained 

stable over time; however, offset demands may have grown qualitatively.

• Most defense offset transactions are with developed nations and are 

associated with the export of aerospace products. 

• Because U.S. policy considers offsets “market distorting,” it places no 

international restrictions on defense offsets and leaves responsibility for 

their negotiation and implementation with U.S. exporters. 

The report also describes the effect that defense offsets transactions and 

agreements may have on the U.S. defense supplier base. For example, the 

Commission reported that while offsets may facilitate defense export sales—

which can help maintain the economic viability of certain U.S. firms—offsets 

can also supplant a significant amount of work and jobs that would go to 

U.S. firms if export sales occurred without offsets. The Commission also 

reported that U.S. technology transfers through offsets often improved 

foreign firms’ competitiveness but rarely resulted in technology transfer 

back to the United States. And while it found that technology transferred 

through offsets did not appear to create a security risk beyond that posed by 

other transfers by U.S. firms, it cautioned that offsets could exacerbate any 

existing weaknesses in U.S. export control processes. 

While the National Commission’s report remains pending and the President 

has not decided on a defense offsets multilateral treaty, Congress required 

GAO to monitor and periodically report to it on the progress in reaching a 

multilateral treaty. The Commission on the Future of the United States 

Aerospace Industry called for the pursuit of a multilateral solution to curtail 

offset demands in defense trade. It suggested that reactivating the National 

Commission may be the best alternative for developing recommendations on 

negotiating a multilateral agreement. 

In commenting on a draft of this report, OMB officials provided technical 

comments, which were incorporated as appropriate. 

Export sales of defense-related 

products often include “offsets”—

industrial and commercial benefits, 

such as technology transfer, which 

U.S. companies provide to foreign 

governments as incentives or 

conditions for purchasing military 

goods and services. 

Over the past decade, offsets have 

increased and in 1998, they totaled 

about $3 billion per year. In 

December 2000, GAO reported that 

countries are becoming 

increasingly sophisticated in their 

use of offsets to achieve regional 

industrial and employment goals. 

In 1999, Congress established a 

National Commission to report on 

the extent and nature of offsets in 

international defense trade by 

October 2001. The Director of the 

Office of Management and Budget 

(OMB) was designated chair of the 

Commission. Congress also 

required the President to report, 

within 90 days after the 

Commission’s final report, on the 

feasibility and desirability of 

seeking a multilateral treaty with 

international trading partners on 

standards for use of defense 

offsets. 

GAO’s report responds to the 

congressional mandate for GAO to 

monitor and periodically report on 

the President’s progress in reaching 

a multilateral treaty. 

www.gao.gov/cgi-bin/getrpt?GAO-03-649.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Katherine V. 

Schinasi at (202) 512-4841 or 

schinasik@gao.gov. 

Highlights of GAO-03-649, a report to 

Congressional Committees 

May 2003

DEFENSE TRADE 

Report and Recommendations of the 

Defense Offsets Commission Still 

Pending 
Page i GAO-03-649 Defense Trade 

Letter 1

Results in Brief 2

Background 3

Commission’s Findings on Extent and Nature of Defense-Related 

Offsets 4

Status of the Commission’s Work 5

Conclusions 6

Agency Comments 6

Scope and Methodology 6

Table 

Table 1: Commission’s Potential Policy Recommendations, with 

Advantages and Disadvantages 5

Abbreviation 

OMB Office of Management and Budget 

Contents 

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Page 1 GAO-03-649 Defense Trade 

May 30, 2003 

The Honorable Richard G. Lugar 

Chairman 

The Honorable Joseph R. Biden, Jr. 

Ranking Minority Member 

Committee on Foreign Relations 

United States Senate 

The Honorable Henry J. Hyde 

Chairman 

The Honorable Tom Lantos 

Ranking Minority Member 

Committee on International Relations 

House of Representatives 

Export sales of defense-related products often include “offsets”—

industrial and commercial benefits, such as technology transfer, which 

U.S. companies provide to foreign governments as incentives or conditions 

for purchasing military goods and services. They include, for example, 

coproduction arrangements and subcontracting, technology transfers, incountry procurements, marketing and financial assistance, and joint 

ventures. In December 2000, we reported that countries are becoming 

increasingly sophisticated in their use of offsets to achieve regional 

industrial and employment goals.1

 Since 1993, when the Department of 

Commerce began collecting data on these transactions, defense offsets 

have increased. In 1998, defense offsets totaled approximately $3 billion. 

The increasing use of offsets in defense trade has generated congressional 

concern because offsets can distort the price of defense contracts and 

undermine competitiveness. 

In an effort to identify current offset practices, the impacts of offsets on 

the U.S. economy, and their role in increasing dependence on foreign 

sources for defense goods, in 1999, Congress established a Commission2

 to 

report to it on the extent and nature of offsets in international defense 

 1

 U.S. General Accounting Office, Defense Trade: Observations on Issues Concerning 

Offsets, GAO-01-278T (Washington, D.C.: Dec. 15, 2000). 

2

Defense Offsets Disclosure Act of 1999, Public Law 106-133, section 1247. 

United States General Accounting Office

Washington, DC 20548 
Page 2 GAO-03-649 Defense Trade 

trade. Congress also required the President to review and report, within 

90 days after the Commission’s final report to Congress, the feasibility and 

desirability of seeking a multilateral treaty on standards for use of offsets 

in defense trade. Congress further required us to monitor and periodically 

report to it on the progress in reaching a multilateral treaty. 

A final report and recommendations from the National Commission on the 

Use of Offsets in Defense Trade are still pending, although under the 

Defense Offsets Disclosure Act of 1999 the report was required to be 

issued by October 2001. However, the 2001 change in presidential 

administrations resulted in vacancies in the five executive branch 

positions on the Commission, which have yet to be filled. The 

Commission’s interim report—Status Report of the Presidential 

Commission on Offsets in International Trade, issued February 2001—

describes the extent and impact of offsets in both defense and commercial 

trade.3

 The report also describes the effect of defense offset transactions 

and agreements entered into by U.S. firms over a 6-year period. For 

example, the Commission reported that while industry estimates and other 

evidence indicate that offsets facilitate exports, they also supplant a 

significant amount of work and jobs that would go to U.S. firms if export 

sales occurred without offsets. The Commission also reported that in a 

number of cases, U.S. technology transfers improved foreign firms’ 

competitiveness but rarely resulted in technology transfer back to the 

United States. 

The interim report includes potential policy recommendations that, 

according to the Commission, require additional deliberation of the 

possible advantages and disadvantages of each. However, the Commission 

has not met since December 4, 2000. Since the President’s report on the 

feasibility and desirability of a multilateral offsets treaty is not required 

until 90 days after the Commission’s final report is submitted to Congress, 

the President has not reported. Subsequent to the Commission’s last 

meeting, another commission, set up to evaluate the health of the 

aerospace industry, recommended that the United States pursue a 

multilateral solution to curtail offset demands. That commission also 

suggested that reactivating the National Commission on the Use of Offsets 

 3

 To address the use of offsets in commercial trade, the President established the 

Presidential Council on the Use of Offsets in Commercial Trade. Membership of the 

Council was identical to the Commission. 

Results in Brief 
Page 3 GAO-03-649 Defense Trade 

in Defense Trade may be the best alternative for developing policy 

recommendations on this issue. 

In commenting on a draft of this report, the Office of Management and 

Budget officials provided technical comments, which were incorporated 

as appropriate. 

Foreign governments often seek defense offsets to reduce the financial 

impact of their purchases, obtain valuable technology and manufacturing 

know-how, enhance domestic employment, create or expand their defense 

industries, and make the use of their national funds for foreign purchases 

more politically palatable. However, Congress has expressed concern 

about the use of offsets in defense trade because they can undermine 

fairness and competitiveness and distort the price of contracts. Offsets are 

frequently negotiated in connection with the purchase of U.S. aerospace 

systems, such as military or commercial aircraft, and sometimes in 

connection with the purchase of U.S. goods and services in other high-tech 

industries, such as power generation or telecommunications. 

The Defense Offsets Disclosure Act of 19994

 established, as the sense of 

Congress, the need to 

• pursue efforts to address trade fairness by establishing reasonable, 

business-friendly standards for the use of offsets in international trade 

between the Unites States and its trading partners and competitors; 

• require the Secretary of Defense, the Secretary of State, the Secretary of 

Commerce, and the United States Trade Representative, or their 

designees, to discuss with industrialized nations the need for reasonable 

standards to govern the role of offsets in international trade; 

• enter into discussions regarding the establishment of multilateral 

standards for the use of offsets in international defense trade through the 

appropriate multilateral forum; and 

• include in those discussions the distortions produced by other benefits 

and subsidies provided by various countries, such as export financing. 

The act also established a National Commission on the Use of Offsets in 

Defense Trade, requiring the President, with the concurrence of 

congressional leaders, to appoint 11 members to the Commission. The act 

 4

 Defense Offsets Disclosure Act of 1999, Public Law 106-133, section 1244. 

Background 
Page 4 GAO-03-649 Defense Trade 

required the Commission to submit a report to Congress addressing all 

aspects of the use of offsets in international defense trade within a year of 

its establishment. It also specified that the Commission include 5 members 

from the executive branch, 3 from industry, 1 from labor, and 2 members 

from academia. In October 2000, the President appointed the 11 members. 

The act designated the Office of Management and Budget (OMB) member 

as the chair of the Commission. Since the change of administrations in 

2001, the President has not appointed new executive branch members. 

Consequently, the Commission has ceased activity and has not issued its 

final report. 

The Commission released its interim report in February 2001. The report 

described the following extent and nature of defense-related offsets. 

• The cost to U.S. exporters of implementing defense offset transactions is a 

fraction of the transaction value. 

• The extent of defense offset agreements relative to defense exports has 

remained stable over time; however, offset demands may have grown 

qualitatively. 

• Most defense offset transactions are with developed nations. 

• Most defense offsets are associated with the export of aerospace products. 

• The most common types of defense offset transactions are 

counterpurchases, subcontracts, and technology transfers. 

• There are no international restrictions on defense offsets. U.S. policy 

considers offsets “market distorting” and leaves responsibility for their 

negotiation and implementation with U.S. exporters. 

The Commission also found the following on the impacts of defense 

offsets: 

• Offsets have a direct effect on U.S. jobs by facilitating exports, but they 

also supplant a significant amount of work and jobs that would go to U.S. 

firms if export sales occurred without offsets. 

• In some cases, offsets hurt the U.S. defense supplier base by transferring 

work to foreign firms, but the erosion has yet to show up in overall trade 

statistics. 

• At the same time, defense export sales may be important to the economic 

viability of aerospace firms and may provide an incentive for their 

development of new defense products and technologies. 

• In a number of cases, U.S. technology transfers improved foreign firms’ 

competitiveness but rarely resulted in technology transfer back to the 

United States. 

Commission’s 

Findings on Extent 

and Nature of 

Defense-Related 

Offsets 
Page 5 GAO-03-649 Defense Trade 

• Technology transferred to foreign firms through offsets does not appear to 

pose a special security risk above and beyond that posed by other 

technology transfers by U.S. firms. 

• However, recent examples show that U.S. export control processes are not 

flawless in preventing the transfer of sensitive technology abroad and that 

offsets could exacerbate any leakages. 

The Commission’s interim report outlines areas for future Commission 

study and several potential recommendations. However, the Commission 

has yet to determine whether these potential policy recommendations are 

feasible or desirable. 

Table 1: Commission’s Potential Policy Recommendations, with Advantages and Disadvantages 

Potential Commission 

recommendation Possible advantages Possible disadvantages 

The U.S. government could seek a 

multilateral agreement with its trading 

partners to reduce or prohibit the use of 

offsets in defense trade. 

• Could diminish adverse effects on U.S. 

jobs, economic competitiveness, and 

national security. 

• Could attract support from labor and 

industry groups. 

• Would likely reduce U.S. export sales. 

• May be difficult to monitor and enforce. 

• The United States may be asked to 

provide concessions, such as greater 

access to the U.S. defense procurement 

market. 

The U.S. government could work 

cooperatively with other countries to shift 

the type of offsets they request away 

from defense subcontracting or 

production. 

• Could help reduce adverse effects of 

offsets on U.S. economy and national 

security. 

• Could provide foreign governments with 

needed political support to import major 

U.S. defense systems. 

• Could be tried bilaterally as well as 

multilaterally, and on a pilot basis. 

• Could yield technological and economic 

benefits to U.S. exporters and other U.S. 

firms. 

• Some foreign governments may not be 

willing to shift their offset demands. 

• A shift in the types of offsets currently 

sought by foreign nations could alter the 

competitive playing field. 

• Does not focus on reducing or eliminating 

defense offsets. 

• Could undermine the competitiveness of 

non-defense industries. 

The U.S government could increase 

foreign firms’ involvement in the 

research and development stages of 

new defense systems to reduce their 

governments’ subsequent demand for 

offsets. 

• Could help reduce offset demands. 

• Could facilitate reciprocal technology 

transfer. 

• Foreign firms’ participation in subsequent 

production of the defense system—a 

natural extension of their initial 

involvement—would result in few 

adjustment costs relative to offsets. 

• No assurance that participating nations 

would reduce offset demands. 

• Participating nations may demand work 

guarantees, which are similar in effect to 

offsets. 

Source: Status Report of the Presidential Commission on Offsets in International Trade. 

According to the interim report, the Commission was to continue its 

deliberations and prepare a final report and recommendations by October 

2001. The final report is still pending. Further, according to OMB officials, 

the President has not determined the feasibility and desirability of seeking 

a multilateral treaty on standards for use of offsets in defense trade. 

Status of the 

Commission’s Work 
Page 6 GAO-03-649 Defense Trade 

However, the issue of defense offsets has continued to raise concerns. The 

Commission on the Future of the United States Aerospace Industry 

recommended that the United States pursue a multilateral solution to 

curtail offset demands and suggested that reactivating the Commission 

may be the best alternative for developing policy recommendations on this 

issue. 

As a major factor in the competitiveness of a company’s offer to sell goods 

and services, offsets are an accepted feature of defense trade. However, 

their use has been shown to distort markets. Recognition that unilateral 

U.S. government constraints could limit U.S. company competitiveness has 

led Congress to establish a commission to address the use of offsets in 

defense trade. It also led Congress to require the President to determine 

the feasibility of a multilateral treaty on standards for the use of offsets. 

While the Commission has taken concrete steps toward fulfilling its 

mandate, it has not completed its work in that it has not issued a final 

report. In addition, the President has not reported on the feasibility and 

desirability of a multilateral treaty. However, the President’s report is not 

due until 90 days after the Commission’s final report to Congress under the 

Defense Offsets Disclosure Act of 1999. 

In commenting on a draft of this report, OMB officials provided technical 

comments, which were incorporated as appropriate. 

To determine the progress in reaching a multilateral treaty, we reviewed 

legislation pertaining to offsets to determine the roles and responsibilities 

of the presidential Commission. In addition, we reviewed the 

Commission’s interim report to identify its potential recommendations to 

the President. We also interviewed several officials from the Department 

of Commerce, the Office of Management and Budget, and the Office of the 

United States Trade Representative who had knowledge of the 

Commission’s deliberations. 

We conducted our work from January through May 2003 in accordance 

with generally accepted government standards. 

We are sending copies of this report to the Secretaries of Commerce, 

Defense, and State, and the Director, Office of Management and Budget. 

Copies will be made available to others on request. In addition, this report 

Conclusions 

Agency Comments 

Scope and 

Methodology 
Page 7 GAO-03-649 Defense Trade 

will be available at no charge on the GAO Web site at http://www.gao.gov. 

If you have questions, please contact me at (202) 512-4841. Major 

contributors to this report were Thomas J. Denomme, Gregory K. Harmon, 

John Neumann, Karen M. Sloan, Robert L. Ackley, and Marie P. Ahearn. 

Katherine V. Schinasi 

Director 

Acquisition and Sourcing Management 

(120224) 
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